New rules to relax single lending limit

Ceiling on loans to lone clients may be raised on a case by case basis

The Bank of Thailand is revising its rules so the single lending limit can be relaxed for commercial banks on a case-by-case basis, and the new rule will come into effect this year, said BOT Governor Prasarn Trairatvorakul.

The current rule prohibits banks from lending more than 25 per cent of their Tier 1 capital to a single client, but this will be relaxed if the central bank warrants it to be desirable.

If a bank requests such relaxation, the BOT will examine the relationships of businesses in the group of the single client and whether the planned lending could affect those businesses. If a case where the client has diverse businesses that are not tightly connected, the BOT might consider relaxing the lending limit.

Some banks have said the single lending limit makes it difficult for them to support large loans to big corporate clients to fund overseas expansion, including mergers and acquisitions.

When expanding overseas, many Thai companies are engaged in high-value M&As. For example, Thai Beverage spent more than US$2.2 billion (Bt67 billion) for a 22-per-cent stake in Singapore-listed Fraser and Neave. The takeover of London-listed Cove Energy cost PTT Exploration and Production about $1.9 billion.

Prasarn said that in practice, banks had already asked for relaxation of this limit on a case-by-case basis but the BOT had yet to have clear guidelines for doing so. Therefore, the revised rule will focus on examining whether, if the economy were to decline, the businesses in the group making up the single client requesting a loan would be hit hard.

But he warned the banks to avoid risk from such lending. If they lend too much to one single client, this could expose the lender to excessive risk.

He said one easy way to lend large amounts to single clients was for the banks to boost their Tier 1 capital with their own profit, or they could join with other banks to provide such loans, thereby diversifying risk.

Prasarn added that it was a must to maintain the ceiling of 25 per cent to prevent the banks from becoming exposed to accumulated risks. He said the BOT did not want to see any banks being brought down by failure of their major clients, as this would have a negative impact on the economy. Therefore, it is much more prudent to take preventive measures.

He said it was well understood why some commercial banks want the BOT to amend this rule, as they want to enjoy fast business growth through lending, but the central bank held the view that gradual growth is preferable.

The banks also enjoyed average net-profit growth of 10 per cent last year, so they can spend this profit on boosting their Tier 1 capital, he added.